After run of rate hikes, banks leave APRs unchanged

Banks paused this week following a recent run of interest rate increases, leaving the national average annual percentage rate on new credit cards unchanged at 12.17 percent, according to the CreditCards.com Weekly Credit Card Rate Report.

Methodology: The national average credit card APR is comprised of 95 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed above. (Introductory, or teaser, rates are not included in the calculation.)

Analysts say card issuers have increased APRs over recent months both in advance of new laws and to insulate themselves from economic challenges. However, based on the latest data, lenders now appear to be leaving rates alone, as the laws begin to take effect and the economic recovery gets under way.

On the regulatory front, the first phase of the new Credit CARD Act began Aug. 20, enabling cardholders to opt out of interest rate hikes and other major changes. Based on that provision, credit card issuers must give consumers 45 days' warning of interest rate hikes, fee increases and other significant changes in terms. When they mail notices of these changes, they must inform card users of their right to opt out -- to close their accounts and pay off the balance at the existing, lower APR.

In anticipation of that change, banks rushed to raise APRs. Those moves didn't surpise Linda Sherry, director of national priorities for Consumer Action, a nonprofit consumer advocacy group. "Do we expect any less of huge corporations that don't care much about the rights of individuals?" Sherry says, noting that both new and existing cardholders are getting repriced. She says that while banks will abide by the new laws, they tend not to go beyond laws in adopting initiatives that are friendly to consumers.

Sherry points to a recently published Consumer Action survey that highlighted the increased cost of borrowing on plastic. "Many, many cards -- close to half of the cards we surveyed -- had increases in the APRs provided in the initial solicitation provided on the Internet," Sherry says.

Meanwhile, the recession also poses a very real threat to banks' profits. "Defaults are as much to blames as the laws coming into effect," Sherry says. "Some banks are in poor shape as far as their finances go."

Rate hikes are one way banks are seeking to recover some lost earnings.

The economy is not the sole culprit. "The companies did make their bed and have to lie in it now," Sherry says, noting that increased credit lines were "handed out like jellybeans" over the past decade. Many of those treats went sour when cardholders failed to repay their loans.

But the worst of the economic collapse could be behind us. On Tuesday, credit bureau TransUnion reported that credit card delinquency rates declined to 1.17 percent in the second quarter, down 11.36 percent from the previous three months.The delinquency rate is defined as the ratio of cardholders at least 90 days late on one of more credit card.

Although TransUnion acknowledged that seasonal trends could be behind the second-quarter decline in delinquencies, it downplayed concerns, which some analysts have expressed regarding borrowers' inability to make payments amid a shaky labor market. "Credit card delinquency remains well within historical norms and is not a cause for significant concern at this time," Ezra Becker, director of consulting and strategy in TransUnion's financial services group, says in the company's press release.

In the end, Sherry says that new banking regulations actually offer an opportunity for banks to re-examine and retool their systems to be more nimble and more fair to customers. While those changes may include a lowering of APRs, Sherry says what she really expects is a change in how cards work and how cardholders want cards to work.

"The industry needs to look at cards and realize just because cards are like this in 2009, cards don't need to be like this in 2010, 2011," Sherry says.

For the bank that breaks from the crowd to offer products that are attractive and fair for consumers, "the company that gets out in front of that is going to have an advantage," she says.

Published: August 27, 2009

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